Manufacturing in India falls as recovery flounders

Bloomberg

India’s industrial output unexpectedly declined in November last year, adding pressure on Indian Prime Minister Manmohan Singh to bolster the economy ahead of elections this year.

Output at factories, utilities and mines fell 2.1 percent from a year earlier after a revised 1.6 percent contraction in the previous month, the Indian Statistics Ministry said in a statement in New Delhi on Friday. The median of 37 estimates in a Bloomberg News survey was for a 0.8 percent rise.

The number was a “big surprise” and economic recovery is still some way off, K.K. Mital, head of portfolio management services at Globe Capital Market Ltd in New Delhi, said by telephone.

The figure revealed a “gap between green shoots of recovery and expectations,” he said.

The Reserve Bank of India’s effort to control Asia’s fastest consumer price inflation by boosting interest rates has prompted the country’s 1.2 billion people to cut back on spending as economic growth falters.

Singh is under pressure to curb government spending as rating companies threaten to downgrade India to so-called “junk” status.

“Industrial production data will continue to remain weak,” said Tirthankar Patnaik, a strategist at Religare Capital Markets Ltd in Mumbai. “Even though we have bottomed out, it is the recovery that we are worried about.”

The rupee, which has slid about 12 percent against the US dollar in the past 12 months, rose 0.3 percent to 61.905 at the close of trading in Mumbai on Friday. The S&P BSE Sensex index advanced 0.2 percent. The yield on the 10-year government bond maturing in November 2023 fell to 8.76 percent from 8.79 percent on Thursday.

Interest rates will remain elevated as long as surging inflation imperils economic growth, K.C. Chakrabarty, a deputy governor of India’s central bank, said last week. Consumer prices climbed 11.24 percent in November last year. Wholesale inflation was 7.52 percent, a 14-month high, as onion prices tripled from a year earlier.

Reserve Bank of India Governor Raghuram Rajan surprised economists last month by holding the benchmark repurchase rate at 7.75 percent instead of adding to increases totaling 50 basis points since taking over the Reserve Bank of India in September last year.

India’s deficit target of 4.8 percent of GDP for the year ending March 31 is a “red line” that will not be breached, Jesudasu Seelam, a deputy Indian finance minister, said in an interview.

The country’s credit rating may be cut to junk unless elections due by May lead to an administration capable of reviving growth, Standard & Poor’s said in November last year.

Singh told reporters this month that his government could have done better at controlling price rises. The prime minister had said the nation’s economy was headed for better times, and recent steps such as faster approvals for road and power projects would boost economic growth.

Overseas shipments rose 3.5 percent last month, a six-month low, as imports fell 15.3 percent. The trade deficit widened to US$10.1 billion, according to Indian government data.

The US$1.8 trillion economy will probably expand 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade, according to central bank estimates.